Good morning, everyone, and welcome to the Neste Half Year Results Conference Call. We'll take the usual disclaimer slide as read as usual. And now I'll hand over to Nestle Chief Financial Officer, Wenli Martello for the presentation.
Thank you, Peter. Good morning and good afternoon. Thank you for joining us on this call. Let me start with some highlights of our group performance this year, then take you through the business in more detail before opening up to Q and A. Our results reflect a resilient performance over the first half.
The group's sales momentum has accelerated both in terms of real internal growth of 2.9% and organic growth 4.7%. Where necessary, we have taken pricing either in response to input cost inflation or as a result of some of the extreme currency moves we have seen this year. Looking at this highlights on a constant currency basis, our trading operating profit margin increased by 30 basis points, underlying earnings per share increased by 3.6% and we generated nearly CHF3 1,000,000,000 of additional free cash. The global operating environment has not changed much since the last time we spoke. The emerging markets continue to grow, but at a lower rate than historically.
The developed markets still face deflationary pressures and weak consumer sentiment. What has become more dramatic is the effect of foreign exchange. This has had a significant impact at all levels of our performance from sales to profits to cash flow to earnings per share. You can see that it accounts for some 40 basis points of difference between our trading operating profit margin in constant currencies and our reported margin. A difference of that size is just unprecedented.
However, the progress we have made in the first half does allow us to reconfirm our outlook for the full year and that is organic growth of around 5% and improvements in margins underlying earnings per share in constant currencies and capital efficiency. An additional highlight is our announcement this morning concerning a new share buyback program. Our intention is to complete an CHF8 1,000,000,000 share buyback by the end of 2015. I'd also like to confirm the message repeated on our roadshows. We remain committed to our AA credit rating consistent with our gold standard within the industry.
This proposed buyback program in line with our sustainable dividend policy provides a very competitive return to our shareholders while at the same time underscoring our belief in the future of our business. So those were the group highlights. I would now normally jump into more detail on our business performance, but this time I want to give you a bit more context, specifically reiterating our group strategy, a strategy that has been very consistent and successful over the years. Our objective at Nestle is to become is to continue our transformation into the world's leading nutrition, health and wellness company. It is clear that in today's highly competitive environment that seems to have unending volatility and headwinds, Products that deliver on the promise of nutrition, health and wellness are among the fastest growing in our industry.
They offer consumers more added value, so increasing our presence in the space and building more nutrition, health and wellness arguments into our portfolio has led and will continue to lead to sustainably higher levels of growth and profitability. In terms of strategy, the first half of twenty fourteen saw us develop Nestle Skin Health. It is in addition to Nestle Health Science as yet another platform for our focus on delivering science based breakthrough products that help people live healthier, happier lives. Of course, strategically, there is always going to be an ongoing realignment of our existing portfolio. Divestitures so far this year include businesses in chilled culinary, ice cream, waters and nutrition.
In terms of organization, Paul and I have both talked about the evolution within Nestle. Sustainable improvement and profitable growth requires us to leverage our scale, generating greater efficiency from our back offices and operations through Globe and Nestle Business Services. We've stepped up our discipline using robust and stream line tools to assess our portfolio, ensuring that we are investing all of our resources behind the real value drivers for the future and holding ourselves accountable for their success. In a nutshell, that is what our roadmap is all about, an ongoing strategic and organizational evolution focusing on our growth drivers, leveraging our strategic pillars and investing behind our competitive advantages. Turning back to giving you some more color on our first half results, you can see here how our focus and determination has played out with broad based organic growth from across all three geographic regions.
When looking at both the zone and globally managed businesses, together with our organic growth was 4.9% in Americas, 1.4 Real internal growth was 2.4% in Americas, Real internal growth was 2.4% in Americas, 2.3% in Europe and 4.2% in AOA. AOA. Variations in the operating environment within these regions. To split this global perspective another way, let us now look at emerging and developed markets. Our businesses in developed markets grew 0.6%.
I don't need to tell you that the trading environment in this market has remained tough around the world. In many cases, we're dealing with deflation. Consumer confidence also remains low. So ensuring that our portfolio is fit to win is more important than ever. We need to make sure we're truly differentiated and offering value to the consumers.
And I believe our positive rig performance across the developed markets speaks volume to this. Our emerging markets grew 9.7% and today represent CHF 19,100,000,000 of sales. The environment in the emerging markets remains a mixed picture. We continue to see very good growth in many of the smaller markets, some recovery in South Asia, while China remains soft in some categories. We've also taken a series of price increases across our emerging market businesses, either in relation to increased input costs or on the back of currency movements.
However, our sustained growth demonstrates the strength of our brands, the quality of our innovations and how well our people are executing our strategy. I should also highlight once again our ability to deliver growth in both emerging and developed markets. At the group level, let's now turn to the trading operating profit margin. As a reminder, our H1 margin last year benefited from a lower input cost environment. Also this time last year, we had increased our consumer facing marketing spend by 15% in constant currencies.
For the first half of twenty fourteen, we faced some increases as expected in our input cost basket in the low single digits. The biggest increase was seen in dairy and that's partially offset by our ongoing efficiency programs. The 20 basis points increase in distribution is mainly related to a mix effect. We have yet again stepped up our consumer facing marketing spend, up 5% in constant currencies. The 30 basis points improvement you see here in marketing and admin came from several restructuring programs and improved efficiencies.
We've invested more into R and D, feeding the pipeline for future development. Finally, here again is the effect of the strong Swiss francs on a reported margin, 40 basis points, the greatest recorded impact from currencies. This gives us an overall 30 basis points improvement in our trading operating profit margin in constant currency. So with that overview on group performance, let us now look at the segments in more detail. Starting with Zone Europe.
Zone Europe achieved 0.6 percent organic growth with 2% real internal growth, offset by pricing action that was taken in what is generally a deflationary environment. When we look across the categories and markets, it is clear that the investments we have made in the past behind new products and brands are supporting this performance. Western Europe saw a continued recovery in Iberia with Switzerland, the Netherlands and Austria also delivering good growth. The U. K.
Continues to be challenged, particularly due to tough market conditions and tough comparisons. France showed signs of a pickup despite deflationary pressures. In Germany, softer performances in Maggie, Chill Culinary and Confectionery were offset by good growth in pizza, insoluble coffee, as well as in ice cream. The growth in Eastern Europe was driven by Russia, especially in confectionery and ice cream. Ukraine accelerated as we went through the start of the year, this despite the ongoing tension in the region.
Elsewhere, the highlights included Hungary and improvements in the Czech Slovak region. Poland had a tough start to the year, especially with the flooding there, but we do see signs of improvement. Across the zone, Nescafe Dolce Gusto, Wagner and Butoni in frozen pizza and Felix, 1, Gourmet and our range of cat snacks are some of the key brands that have driven a lot of the growth. Premium offerings of Nescafe delivered good results with Gold leading the growth. In Confectionery, we had a solid recovery versus the Q1 as expected due to the late Easter, but the tough comparisons in the UK and France had an impact.
In ambient culinary, sauces, soups, snacking noodles and the continued rollout of Papyrus cooking papers particularly in the Great Britain region and Germany. To wrap up the categories for Europe, ice cream had a strong growth in many markets, especially with MovemberPeck, but a lot of this was offset by the weather and economic condition in some markets such as Greece and Italy. The trading operating profit for Zone Europe was 14.8%, slightly down 10 basis points and this mainly reflects impairment costs. Now moving on to Zone Americas, the Zone achieved 4.9% organic growth, 1.7% RIG and both North America and Latin America contributed. In North America, the frozen food business continued to be weak.
However, as we discussed just a few weeks ago at our Investor Seminar in Boston, we will continue to drive innovation in this category, both with new product launches and our consumer communications. Staying with the frozen aisle, but moving on to ice cream, the dryers premium business remained weak, but our super premium segment had a solid first half as Haagen Dazs Gelato continues to grow well. Both the Impulse drumstick and Outshine brands also did well. Confectionery had tough comparables for the half in the U. S.
And the Butterfinger Cuffs remain the highlight. Confectionery in Canada enjoyed a strong performance driven by KitKat and Aero. Salable coffee accelerated as we went through the half and Coffee Made delivered another good performance, especially given the good growth we saw at the same time last year. As with many positive stories, it is our support in innovation and renovation, particularly the special flavors we have launched in liquid, which continue to drive this growth. Pet Care continued to deliver good growth through line extensions and new product introductions.
The brand Beyond was relaunched and is a key initiative in the natural segment. The lightweight litter continued to drive growth and we have reintroduced Wagon Train Snacks to the market. In Latin America, Brazil again delivered with expected confectionery growth recovering in the latter part of the first half. Mexico was more challenging in large part due to the indirect effects of the fiscal legislation changes there, but it did improve versus the Q1. The majority of our smaller markets across Latin America also performed well.
Looking at the categories in Latin America, Nescafe Dolce Gusto continues to do well across the region and I would highlight the performances of ambient dairy and powdered beverages, ice cream and pet care. In fact, pet care across the region continues to do remarkably well. The drivers being Dog Chow, Pro Plan and the RIVENA launch for the pet specialty category in Brazil. Zozone's trading operating profit was up 10 basis points at 18% and this was primarily due to lower restructuring and other expenses that offset the increase in our consumer facing marketing spend. Now moving on to zone AOA.
We had 4.7% organic growth and a slowdown in rig from the Q1 to 1.9%. And this is partly due to the pricing we've taken in several key markets and of course a subdued China. Overall, our premium offerings and rollout of new products continue to deliver good growth for DAZN. Just as an example, Nescafe Dolce Gusto delivered double digit growth as its rollout continued. New launches including Yinlu Walnut Milk in China and renovated tax for Milo in Australia both had excellent starts.
In the emerging markets, strong performances in the Philippines, Turkey, Pakistan and many markets in Africa were offset by continued softness in the zone's largest market, Bing, China. However, we do see the fundamentals of our business there improving. South Asia has recovered somewhat, its growth reinforced with new products in beverages in India, Nestle Masala, Buttermilk and Nestle Sweet Lassi. We also launched Nestlek Opti Start in some markets. This new and improved Nestlek has been a success in Europe and has now had a good start in Turkey and the Middle East.
There was solid growth across the zone for Milo and Cocoa and malt beverages, Maggie in ambient culinary and for creamers. Developed markets had a reasonable start for the year with a particularly strong few months 1st few months in Japan. Our 2 big categories in Japan confectionery and coffee with KitKat and Nescafe continue to deliver. In Oceania, we had a successful rollout of low fat Carnation Cooking Clean and Felix Cat Food. Zone AOA's trading operating profit margin decreased by 20 basis points to 18.9%, reflecting the input cost increases mainly in dairy, but also the currency environment in which we're operating.
Next up Nestle Waters. The bottled water market continued its growth trend in developed markets and grew double digit in the emerging markets. Nestle Waters ended the first half with 6.1% organic growth confirming the good trend of the Q1, which was 6.2%. All geographies had solid volume performance. However, pricing remained challenged in mature economies.
We had rig of 7.3%. More specifically in North America, we saw an acceleration of our growth versus last year. And this was driven mainly by strong volume across U. S. Retail, thanks to our regional spring waters and our international brands Perrier and San Pellegrino.
In Europe, while pricing was down reflecting the market environment, rig was very good with some markets double digit. Now of course, the good weather did help. In our emerging markets Nestle Pure Life continued to drive growth, especially in China, in Egypt, in Brazil, Turkey and Pakistan. Just as a side note, I'd like to remind you all that Nestle Pure Life was first created in Pakistan, which is goes to show that Nestle is a company that can take innovations from anywhere in the world and turn them into global successes. To close the comments on Waters, the 80 basis points increase you see here in the trading operating profit margin was largely driven by leveraging the growth I've just described and also by the continuous improvement mindset that has resulted in cost reduction across all parts of the Nestle Waters value chain.
Looking at Nestle Nutrition and organic growth of 7.9%, 3.8% of which was RIC showed acceleration through the first half. The main drivers were double digit growth in infant formula and infant cereals. The pattern of growth was similar to that of the Q1. Our emerging markets remain the key driver of growth. And as I said back in April, the choices we have taken in the U.
S. On being more selective, focusing on value generation and optimizing use of our assets has had an impact on our top line growth for developed markets. The trend with regard to our infant formula brands is the same as the Q1 too. The premium and the super premium offerings such as none and Aluma delivered outstanding growth. Infant Cereals had good growth, especially in Latin America and in Africa.
The U. S. Has also had a good half year following the new packaging designs launched last year. Our meals and drinks business has suffered a result of the declining category in Europe and the intense competition in North America. The improvement of the trading operating profit margin to 21.1 percent, up by 110 basis points, reflected the good performance of Wyeth Nutrition and Active Portfolio Management, focusing on value added innovations such as non our hypoallergenic formula.
Finally, taking a look at what we call our other businesses. They achieved 5.9% organic growth with 4.7 percent RIG. Nestle Professional Growth gathered momentum during the first half. Our emerging market businesses were the key drivers in professional. We saw signs of recovery in our Chinese out of home market and the Philippines, Malaysia and Singapore did well.
Russia was a standout performer in Eastern Europe. In Western Europe and North America, the macro conditions continue to affect growth. The beverage business in Latin America has had a good start to the year and our dessert solutions had a good performance in zone AOA. Nespresso. Nespresso again delivered strong global growth.
The business has shown its resilience in the increasingly competitive market of single portion coffee. We continue to grow we continue to grow well where the brand is established and have accelerated our geographic expansion, opening 14 new boutiques around the world in the first half. Innovation continues to drive performance, whether it is through the extension of our Grand Cru, I know I'm mispronouncing Grand Cru. Every time I mispronounce this, I know my French, Jean Marc Duvoisin, who runs our Nespresso business, Quench. Well, it's probably the Chinese American, Filipino accent, Grand Cru coffee range.
The introduction of new machines or even the Nespresso Cube, a completely automated boutique. I'm also happy to report that our investments in North America with the Virtual Alliance system have seen a good response. Moving on to Nestle Health Science, new products and the continued rollout into additional markets of Peptamem, Alpha Amino and VitaFLO's Carb0 and BetClick achieved good results. Boost in the U. S, Maretine in Europe and Nutrien in Brazil also achieved solid growth.
The trading operating profit margin for other was 18.4%, down 80 basis points. And this is a reflection of our marketing investments such as those for Nespresso. We also had currencies impacting our margin, particularly from professionals emerging market businesses. With that wrapping up our segment reporting, I will now move on to take a brief look at our product segments. I've touched on much of this already from the zone perspective.
From a sales point of view, we have had good organic growth in the majority of our categories. On the flip side, our prepared dishes have been challenged as I mentioned earlier, mainly due to the frozen aisle in the U. S. Confectionery had tough comparisons in terms of organic growth and the competitive environment in our key markets remain intense. From a trading operating profit perspective, I would highlight the improvement in nutrition, in waters and pet care.
With pet care being affected last year by the voluntary withdrawal of Wagg and Train. Prepared dishes and cooking aids margin reflects the lack of volume growth in frozen. And Confectionery faced higher commodity costs. Now looking below the trading operating profit to the rest of the income statement in more detail, you can see that we have a drag on the net operating expenses. And this is mainly due to monetary corrections driven by hyperinflation accounting.
It is also clear that there is an impact on net profit, which when coupled with currencies has affected the reported earnings per share. However, like I mentioned earlier, underlying earnings per share in constant currency is up almost 4%. Our free cash flow is at a similar level to last year, especially when given the currency impact. I realize that this is not the whole picture as we're only halfway through the year. But looking at CapEx spend and other elements, we've seen an improvement.
In terms of working capital, the delta from last year is the tough benchmark as it was quite a major improvement. Having said that, we have continued to lower working capital as a percent of sales. I can assure you that from an operational perspective, our people continue to focus on delivering sustainable improvements on all areas of working capital year on year. Perhaps at this point it is a good place to remind all of you listening to our priorities for the use of cash. 1st and foremost, our priority is to continue to invest in our business behind our brands, creating innovative products, investing in future growth drivers of our businesses.
You've heard me talk about the new rollouts and hopefully you can see the evidence of our work wherever you buy our products. At the same time, we have stepped up the rigor in our capital allocation decisions focused very much on higher return, higher growth opportunities. 2nd, we continue to look we continue to enhance our portfolio with acquisitions. As we've always said, acquisitions have to meet all three criteria, not 1, not 2, but all 3. And that is 1st, a compelling strategic rationale 2nd, good financial return and last but not least, a strong cultural fit between us and the acquired company.
Looking at 2014, post our Nestle Skin Health transactions, the likelihood for the balance of the year will be bolt on acquisitions. In addition to acquisitions, we continue to either fix or divest underperformers. Like our CEO, Paul Borkae always said, we accelerate, we fix or divest as we look at our portfolio. Dealing with businesses or assets which are making inefficient calls on our capital. Capital that we can employ behind businesses that are clearly doing well or businesses that has a lot of potential that we should be accelerating.
Thirdly, we also believe in a competitive shareholder return through a sustainable dividend policy and where appropriate share buybacks. Our announcement today of the CHF 8,000,000,000 share buyback is a consequence of our discipline in generating and managing our cash. So to recap, our half year performance was one of broad based profitable growth in what remains a tough and volatile trading environment. Positive contributions from both emerging and developed markets reflect the agility of our different businesses to react rapidly and effectively to their individual challenges. Our performance to date also shows the value of our brands and the importance of innovation that allows us to price as necessary while delivering volume growth.
And in terms of our execution and the Nestle roadmap, I've talked about strategic the strategic and organizational transformation that continues within the company. Our portfolio continues to be reshaped in line with our nutrition, health and wellness strategy. And I'm very happy to confirm our outlook for the year, which is organic growth of around 5% and improvements in margins underlying earnings per share in constant currencies and capital efficiency. And on that note, I would like to open up to questions.
Many thanks, So with that, we have the first question from John Cox of Kepler. Go ahead please, John.
Yes. Good morning. I have a couple of questions for you. Just on the organic sales growth in Q2, which appears to accelerate to around 5.2%, obviously, from 4 point 2% in the Q1. Just wondering what you think the Easter impact was?
Do you think it was like maybe 20, 30 basis points in Q2? Or are you pretty comfortable for us just to go away and start penciling in above 5% organic sales growth for the second half of the year? That's the first question. Second question just on what you said about bulk today and obviously the $8,000,000,000 share buybacks you've announced today. I guess we can just maybe you can just reiterate you don't see any sort of big bang M and A then for the remainder of the year.
I know you won't comment on individual cases, but there is obviously a lot of speculation in the infant nutrition and medical nutrition space specifically. And then just a last question on the hyperinflation accounting. I wonder if you could just elaborate a little bit. I guess you're talking about Argentina there specifically. Thanks very much.
Thank you, John. Hey, on organic growth, clearly, like I said before and you're right, we saw an acceleration in Q2. But let me be clear on this. In terms of guidance for the balance of the year, we remain I reiterated that it is going to be around 5 percent. And earlier this year, we spoke of growth being weighted to the second half.
At the Q1, we expected the growth for the full year to increase sequentially. And indeed, like you said, the Q2 is much stronger, so much so that we now expect organic growth to be more balanced between the first and second half. Now the difference in timing reflects the volatile environment as you would have already seen in the results reported by so many other companies. And I should also say that our business is large and diversified. And so forecasting to the last basis point is kind of meaningless.
So to just to give you a sense, 10 basis points amounts to something like a few hours of sales for Nestle. So what's important to bear in mind is that we confirm our outlook for the year, organic growth of around 5%. So an improvement in margin underlying EPS and constant currency, capital efficiency and short progress on both top and bottom line. On your go and recite what the IFRS go and recite what the IFRS paragraph is on this. The corrections have been made on monetary items on the balance sheet that is exposed to currency devaluation.
And this is something that we do year in and year out. This is not something new. We do this. There was an amount that was recorded also last year. And so and again, I think I said this in the fall during our 9 months conference that Nestle has been in many of these countries for many, many years.
And so it's been there, done that, got the T shirt for it. So this is nothing new. It's something that we're very comfortable with. Venezuela is a relatively small market for the Nestle Group. You mentioned Argentina.
Argentina is even smaller. And like I said, we've been present in Venezuela since I think 1895 when the first product was sold by distributors. So we continue to serve our consumers in Venezuela and we clearly so this is not something that we lose sleep over. In terms of the CHF 8,000,000,000 buyback, the pacing of the share buyback program, our plan is to complete it by the end of 2015. And clearly, it depends the pacing of it depends on market condition.
I think that answers your 3 questions, John. Next question, please.
Thanks. Next question is from Eileen Ku of Morgan Stanley. Go ahead please, Eileen.
Good morning, Eileen. Hope you're well. Eileen Ku here, Morgan Stanley. A couple of questions from me. The first one is actually on the emerging market growth acceleration.
It looked like there was a sequential growth sorry, sequential acceleration to around 11% in the Q2. I was wondering if this was an actual underlying trend or are there timing related factors etcetera that you'd like to call out? And if so what is the actual sort of trend overall on an underlying basis? And then secondly, would you be able to remind us what sort of leverage ratios you need to remain within in order to satisfy your AA plus credit rating, so metrics like net debt to EBITDA etcetera? And finally on the environment in Europe, which is deflationary overall, I mean, do you have any view on whether this is primarily a cyclical issue I.
E. Due to the recession? Or are we potentially looking at a more long term structural issue maybe a shift in the balance of power between retailers and producers? It would be interesting to get your view there. Thanks very much.
Hey, hi, Lee. How are you? Let me start with emerging market. Like I said before, it's mix. We see acceleration in smaller markets, subdued in China, although that is again in China, we're seeing a mixed picture even within China because some categories are doing really well and some other categories are actually have slowed down.
Let me just remind everybody, emerging markets now account for at least in H1, 44% of our sales. Now even though these economies have slowed, we continue to be bullish because it does represent a huge opportunity for the future. And growth in emerging markets is usually volatile. So what we saw in Q2, it's broad based acceleration versus Q1. And even in Brick, we also saw acceleration, India and Brazil improved.
China for us on a NIM basis also accelerated. And by product, the drivers for Q2 acceleration were confectionery, infant and culinary. In terms of your AA, we're very even with the billion buyback over this year and next year, it allows us to maintain the AA credit rating and there are many criteria that the credit rating agencies look at, but obviously one of the main financial criteria is EBITDA to net debt. And so, but I'm not going to go into the details in terms of how much and what it is. And in terms of Europe, we do not we are seeing some pickup in terms of I mentioned before Iberia region, but I don't I mean, we don't foresee any change in terms of the deflationary environment we continue to operate in.
It's in terms of rig in Zone Europe, if you look at our business, rig did accelerate after a slow Q1. And so but as you can see, it's very obvious price remains in the negative territory. And so it's and depends on the country and on category, Dolce Gusto Pet Care continues to accelerate it and some categories picked up because as we have called out because of the Easter impact. So good luck with your baby Eileen.
Thanks for your touch, Huynhui.
Next question?
Thanks very much. The next question comes from Jean Philippe Bertsch of Fonthorpe. Floor is yours, Jean Philippe.
Good morning, Wendling. Thanks for taking my question. The first one would be on Russia. You were like saying that the market was quite strong there. How do you see the situation right now with the political situation?
And if you see some impacts from the announced agricultural import ban that was announced last night? And the second one on China, if you could share with us maybe the growth rates, if it was like in the low single digits? Thanks very much.
Hey, Jean Philippe, Como Saba. Two questions. I think the first one is Russia. It's obviously the situation in Russia continues to be fluid. We pay close attention to international sanction and obviously ensure that our business activities are conducted accordingly.
Now just want to point out over 90% of our products produced in Russia are distributed and sold domestically. So I mean clearly, whatever happens going forward will have an impact in terms of consumer demand. But we're very pleased with the performance in H1 for in Russia. It's we have 8 factories, 10,000 employees there, good first half growth, thanks to innovation despite the economic uncertainties driven by its Nescafe Dolce Gusto, confectionery especially with KitKat, PetCare and ice cream. In terms of China, we are not the 1st to tell you that China has slowed down.
So that's no new news. For us, the difficulty relates to some categories like coffee, wafers. But that's if you think about a big market like China and a big market slows down, there is to a there is going to be a certain level of destocking that has to happen when it slows down. So that is exactly what we're seeing. But in categories like professional, waters, nutrition, we're doing well.
And our expectation for the second half in China is in fact a gradual recovery. So I think that answers both your questions in terms of Russia and China. Thank you,
Thanks very much.
Thanks. Next up, it's Jeremy Fialkow from Redburn. Go ahead please, Jeremy.
Good morning, Jeremy Fialkow, Redburn here. Really just one question, which is on your pricing in emerging markets. You talk about the rig, particularly in zone AOA coming under some pressure because of the fact that you'd taken pricing to offset higher input costs. Could you talk about what the competition is doing, whether you've actually been the one that's gone in front and then other people are now cashing up? Or do you find your competitors haven't really responded to the higher costs and you're still losing a little bit of market share because you're the one that moved.
So if you could just give us some more color on that would be very useful. Thanks.
Hey, Jeremy, at the risk of sounding like a broken slightly driven up by emerging market and will our expectation slightly driven up by emerging market and will our expectation is we should accelerate further in H2. But again, we don't guide on pricing based on sitting here in Bevy. Now pricing in H1 of 2014 was driven by, like we talked about, emerging markets, it's in terms of category, it was dairy, confectionery, nutrition, coffee pricing is starting to also take place, but developed markets continue to be very deflationary. And if you compare Q2 to Q1, pricing did increase. And so that's all I can say about pricing.
And in terms of competition, I don't really comment on what competition is doing. Again, our local market does what it has to do to remain competitive and we go back to pricing is local, pricing depends on market, pricing depends on category, even within a market. Thanks, Jeremy.
Thanks.
Thanks very much. And next question is from Warren Ackerman, Societe Generale. Go ahead please, Warren.
Good morning, Wang Ling. It's Warren Ackerman here at SocGen. Two questions. First one is just on the U. S.
Obviously, coming back from the investor seminar, you gave us a lot of detail about your thoughts on the U. S. But I was wondering whether you could just tell us what the rig and pricing was in the U. S. In the first half?
And do you is there any reason to expect an acceleration in the second half? That's the first question. And the second one is just on input costs and coming a little bit back to Jeremy's question. I'm just thinking about the 4 of your big ones, dairy, sugar, coffee, cocoa. We've seen some big differences and movements.
Sugar is well down. We've seen the global dairy trade auction is now down 40% since February, which ought to give you a big gross margin tailwind. Just wondering whether you think you can retain these benefits? And then on coffee, coffee prices have moved up ahead of a lot year to date. So you talked about taking some coffee pricing, but we've also seen cocoa pricing moving up a lot as well.
1 of your competitors yesterday talked about significant pushback from the trade on getting that pricing through. So obviously, we've got a lot of different moving parts here, Wang Lee. I'm just wondering whether you could sort of talk about those 4 commodities and what it all kind of means for you, particularly with reference to sort of second half margins? Thank you.
Hi, Warren. Let me start with your first question which is in the U. S. And you as you rightly pointed out, we took the opportunity in our annual, our yearly Nestle investor seminar to deep dive and give our investor community a lot more color and specificity on a specific area of our business and this year was in Boston highlighting every single category in the U. S.
So for those of you who did not have the opportunity to participate, the presentations are all on demand on our website. So please I would encourage you to do that. And in the presentation, we, our management team, I was very transparent in highlighting what the issues are and what the plans are going forward in terms of addressing those issues. But let me come back to H1 from a U. S.
Standpoint and I will talk about NIM. NIM, USA, no question, is subdued, but positive rig and organic growth at a NIM level, okay? So we saw Nusa, I talked about that frozen and ice cream continues to be challenged, but pet care good growth, water continues to be good, professional improving from albeit from a low level. The environment is challenging, but no other company has the breadth of Nestle with like 40 segments in the U. S.
Consumer spending is low and due to a whole host of factors. But we're focusing on improving communication, focusing on NHW and adjusting to trends like natural, protein, gluten free. And we also the really good news too is we've achieved cost reductions in the U. S. And continue to be focused on that.
In terms of COGS, it's our input costs, let me just give you color in terms of agricultural commodities. Now you know we do take hedging and forward cover to deal with short term volatility of prices of our key agricultural commodities. And so year on year, we've seen price increases mainly in coffee and cocoa, while it has been more benign on for other raw materials. I think coffee prices as you know has been up especially Arabica is up 40 I think year on year due to Brazil drought and the fund buying. Cocoa prices also up supported by strong demand.
So if you look at our COGS, we talked about our COGS was up 20 basis points due to a slight input cost increase in dairy and cocoa, but our input cost increase was more than was offset by NCE efficiencies. For the full year 20 14, we still see input costs up in low single digit. Now that's but higher than in 2013. Now pricing taken in the first half help COGS should help COGS in second half with regards to higher costs of coffee and cocoa and cost of other raw materials should be more benign. So that should answer your two questions.
Thank you, Warren.
I I just follow-up very quickly just on dairy, Wang Ling, because I think dairy is one of your biggest soft commodities and we've seen global trade auctions pricing collapsing. I mean, we're talking about down 40% now since February. I mean, should that not give you quite a big gross margin tailwind?
Yes. Dairy prices have moved down from a high level. It's still up, but it's moved down from a high level and that's due to global supply increases exceeding the demand growth. And so it's that's what we're seeing in terms of dairy.
Okay. All right. Thank you.
Thank you.
Thanks. Next up is Alain Oberhuber of MainFirst. Go ahead, Alain.
Yes, good morning. Alain Oberhuber, MainFirst. A short question on currencies. If we see currencies remaining stable, how much would be then the negative impact on your margins for the full year? And the second question is more specific about France.
Do we see a similar situation then in the other European markets? Or is France picking up or just staying at these levels?
Yes. Let me answer your first in terms of FX. I highlighted in our in my presentation earlier that this is my gosh, this is like very significant headwind, 40 basis points impact on margin. Now just to remind, I think everybody knows, so this is sort of like stating the obvious. FX mainly have a translation impact with small and so because we sell where we produce.
So with a good match between cost and sales generation, so I don't want people to forget that. Significant impact of FX on H1 figure sales negatively impact by 8.8% and trading operating profit margin by 40 basis points. Now having said that, we do not guide what the FX impact should be for the balance of the year, but do remember also that we're comping from an FX standpoint against it will be easier comping for the balance of the year. So that's what I can say without giving specific guidance. Now your second question in terms of France, we did see a Q2 pickup in France, but we're still looking facing a deflationary environment in France.
We saw positive rig and OG with broad based Q2 acceleration despite the deflation. OG still impacted by contracting categories, whether you talk about culinary, you talk about soluble coffee or chocolate, but we saw improved and strong performance, Nescafe Dolce Gusto, pizza, ice cream, chilled water, Nespresso, where we saw slow performance was chocolate culinary. And so yes, so that should hopefully give you some color in terms of our French market.
Next question from James Jones of RBC.
Two questions for me as well, please. Your restructuring costs in the half were CHF41 million, so decimal 0.3 percent of sales. You
have been talking for
a while about restructuring costs increasing. Has that got into reverse? And secondly, CapEx, sorry, working capital, you had quite a chunky outflow in the half year. Are we if there's sort of easy benefits in terms of working cap being made or is there more to come still?
Let me in terms of restructuring, you know we do not guide on these items as this restructuring expenses are booked when incurred and it's hard to guide on this. And so I will say though trading items decreased 10 basis points in the first half because of lower restructuring in zone AMS. We had if you recall last year in what is this we had widened train voluntary recall. So that was an item that was in H1 of last year that clearly was not repeated this year, but it's also offset partly offset by higher impairment in assets of assets in both Zone Europe and Nutrition. So when you talk about restructuring, it's very difficult to forecast and because it's just a lot of moving parts.
And in terms of CapEx, it's in line with our objective to lower CapEx to between 4% 5% of sales. So that's we're not
Sorry, I missed that. I misspoke. I meant working capital, Lendly.
No, no. Working capital, like I said, we continue to improve in terms of working capital from an operational perspective across whether it's accounts payable, receivable, inventory, we continue to improve. In fact, if you look at working capital in Swiss francs in absolute level, it increased versus last year, year end 2013, but was below the level of June 2013. Now we have some seasonality in working capital for inventories, but so it's normal to see an increase at midyear, but I can tell you that working capital as a percent of sales decreased between H1 of 2014 and H1 of 2013 and trade net working capital as a percent of sales is also down. So from an operational perspective, I'm very comfortable and very happy to report that the organization continues to be very focused on it.
Thank you. Thanks, Edward.
Thanks. Next question is from Patrick Schindeman of Zurcher Kantonalbank. Go ahead please, Patrick.
Good morning, Wendling. Again, regarding the input costs, you were mentioning for the full year that you would expect again a low single digit increase as it has happened in H1. Did I get this right that you don't expect increased pressure in H2 from the input cost side? That's my first question. Secondly, regarding EBIT margin development in Confectionery, which was down 2 10 basis points in H1.
It was already down last year in H1 by 110 basis points. So what's happening here in concession rate? Thank you.
Good morning, Patrick. Yes, in terms of input costs, like I said, it's we are the basket of agricultural commodities that we buy. Again, I just have to repeat that for the full year, it's low single digit higher than 2013. In terms of confectionery, the trading operating profit margin is impacted and also intense competitive environment. And so in most notably in Western Europe, in developed markets where the environment is deflationary and we it's tough for our businesses to take pricing.
Our Confectionery business is growing overall if you look at that category. In the last 5 years, the average organic growth was 6%, RIG was 3%. And our focus also is continue to grow our confectionery business in emerging markets and very exciting to see that a global brand like KitKat has very good growth even in emerging markets. So and so it's yes, cocoa price is putting pressure on all chocolate on all confectionery players margin and we're no exception.
All right. Thanks both, Wendelin.
Thank you.
Many thanks. And the next question is from Corinne Gretler of Bloomberg. Go ahead please, Corinne.
Hi. You already answered one of the questions from the analysts about the Russia situation on your business. Can you just ask one more question? Do you think the current crisis can and will hurt the economic recovery in Europe?
Yes. I think we've touched on this before. I think the thing to underscore is the trading environment on a global basis is very volatile. And you've seen it in our sector, outside our sector, given the reporting the reporting season that started a few weeks ago. And so it's a very volatile trading environment.
In terms of Europe, there is we do not anticipate that deflationary environment will go away anytime soon. But so again, this speaks to the strength of our brands, our people executing very well and our innovation. So yes, I mean, the environment is tough, the environment is volatile, but we will continue to deliver.
Thank you very much. We have one another question now from David Hayes of Nomura. Go ahead please, David. The floor is yours.
Thank you. Good morning all. Two areas for me if I can. Just in terms of Europe and I guess France, specifically Mondelez yesterday talking about very difficult negotiations in coffee and confectionery, in particular in France, which led to effectively a standoff in terms of shipments and ordering coming through, which would suggest some catch up attention in the second half as those negotiations get resolved. I just wonder whether you'd seen a similar dynamic in Europe and whether you would similarly see therefore a little bit of an uplift into the second half as you see that catch up?
And then just in terms of one offs, I'm just wondering whether in beverages, was there any impact from I think the global launch of or re launch of the Nescafe packaging and whether there was kind of stocking into that shift? And then similarly one off wise in terms of nutrition with contract, I think you bought away from 3 states year on year first half. I just wonder whether you can quantify whether that was quite impactful? What kind of impact that would have had on rig in the Nutrition business? Thank you very much.
Hey, David. Yeah, you know what, in terms of France and the impact of listen, our trading our retail trading partners, we it's not easy all around. But that's hey, this is part of doing business. And so it's whether it's in France or it's in any other developed markets, it's not just in Europe, it's also in North America. It's part of doing business in our so I don't know what else to say beyond that.
In terms of beverages category, it's our trading operating profit margin was down 20 basis points and that's because of increased consumer marketing spend behind in coffee and cocoa beverages. And so and your other question terms of nutrition and U. S. Infant business impacted by the WIC contracts, we do not pull out specifically how many basis points that would have had on our growth. But I will say though, the slower infant nutrition in the U.
S. Is in fact due to selective presence in WIC contract. You're right, we exited 3 states and so it's and that has had an impact. But that is deliberate because we want to grow our business profitably. Thank you, David.
And now we come to the final question from Jon Ravall of The Wall Street Journal. Go ahead please, Jon.
Good morning, Wanling. A couple of points. Just wondering, in terms of developed markets, they seem to have slowed quite a bit from last year. So I was wondering generally how much tougher is it getting out there? And can you give a bit more color in terms of the deflationary pressures you're facing out there?
Like what particular categories is it affecting? And is that the retailers pausing down the prices? Or is it just consumers refusing to pay high prices, so you want to lower your prices? That's the first point. And what you're doing about it?
And then the second point is your divestment program that was sort of announced last year, obviously, you said that's continuing. Could you just give us any more sort of color about what's going on there moving forward? I mean, are we to expect any further big things moving forward? Or what's going on with the sort of review of the overall business?
Good morning, John. It's in terms of macroeconomic environment and developed markets that continues to be difficult. We are seeing some patches of signs of economic improvement. And in some in many cases, it's not translating into sort of like more food and beverage spend. Consumer confidence remain still low and in many cases, the environment continues to be deflationary.
So but again, we continued as you see evidenced by our growth in H1 in both in developed markets. And so especially in rig, which is our real internal growth. In terms of your second question of divestment, we I alluded to in my presentation earlier that our CEO, Paul Boulky, talks about when we look at our portfolio, we either have to accelerate, have to fix or divest. And so that's an ongoing process. It's a divestment.
It's not just about divestment, it's also about acceleration and that is an ongoing process. We are doing that ongoing and it's a process. So it's nothing more specific that I can share at this point. So I think that answers John's question. And I will say, have one question for everybody who didn't answer the question.
So I think started with John Cox that asked a question about full year organic growth in terms of H2. And so I wanted to also build on that point in terms of trading operating profit for weighting in terms of H2. Our margins benefited from operational gearing on stronger sales growth in H1. So maintaining our momentum through the second half and beyond will require further investment in the business to generate growth. And so we're committed to making this investment.
So you should expect a constant currency margin improvement for the full year, which is what we committed and which is what I reaffirmed this morning, but that would be lower than what we show for the first half. So however, again, we reconfirm our guidance of an improvement in constant currency margin. And so with that, I want to thank you all for joining us. I look forward to seeing many of you on roadshows over the coming months and speaking with you again at our 9 months call in October that's I think October 16. So until then, thank you.
Have a great summer and bye for now.